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The Entirely Unalarming Fall in Syndicated Lending

Felix Salmon over at Reuters gets slightly hyper over the recent fall in syndicated lending globally. It’s true that if this were to be seen in isolation then we might not be so blase about it. But syndicated lending is only one part of large company financing and so it’s a lot less troubling than Felix seems to think it is:

Syndicated lending is the big and boring part of the bank-loan market — the bit where huge corporations borrow so much money that they need to line up a consortium of banks to get the deal done. As you can see, in boom years syndicated lending can reach $1 trillion per quarter, so this is an enormous market. And as you can also see, very clearly, it seems to have fallen alarmingly this year — not the kind of thing you want to see in a global economy which is supposed to still be in the early stages of a recovery.

The big picture here is that in healthy years, the world does about $800 billion or more in syndicated lending per quarter; of that, somewhere north of $400 billion comes from the Americas. By that criterion, the global lending market has been healthy since the fourth quarter of 2010.

But it’s not any more. Total lending in the first quarter of 2012 was just $646 billion, down 20% from the first quarter of 2011, and down 29% from the previous quarter. The Americas also saw their lowest total since the third quarter of 2010, but there the really bad news is hidden elsewhere: a good 70% of total issuance in the Americas is refinancings, where companies roll over their existing debt. Just 30% of the total is represented by new money coming in to the market.

So, if we restrict ourselves purely to debt financing for these large companies, what is it that ameliorates these figures? Makes them rather less worrying?

The first is the reason for seeking funding. These big loan syndications are often about takeovers and even more often about taking a company private. It’s not unusual if you want to take a public business private to line up such a bank syndicate for the short term financing needs. You then refinance, perhaps into bonds, at some later date when you’ve been able to really grapple with the internal dynamics of the company. We might note that in the current economic situation there are rather fewer such cash paid takeovers and private equity deals than there were in the boom times. What deals are being done are more often with equity these days.

Then there is the generally accepted idea that the financial crash was all about leverage. This is what made the banks fragile, that they had “too much” in loans out there for the capital base trying to support said loans. We’d like to make the banking system more robust and thus banks are generally being encouraged to improve their capital ratios. That is, either cut their loan books or increase their equity capital. That the banks are making fewer multi-billion dollar loans is simply a side effect of this welcome process.

Then there’s two further points on the supply side of corporate financing. Syndicated loans are not the only source of corporate financing. Another would be bonds: according to one of Felix’s commenters this last quarter was the biggest in history for corporate bond issues. So perhaps the corporations are raising just as much debt but just not doing it through the intermediation of the banks. We like this for the reason given in the paragraph above.

And finally there’s the point that neither borrowing nor issuing new equity are the only sources of corporate finance. There’s also retained earnings:

US non-financial corporate cash holdings rose to $1.24 trillion at the end of 2011, reflecting the strength of companies’ operations in emerging markets and the negative tax consequences of repatriating cash to the US, according to a new report from Moody’s Investors Service. Apple Inc., Microsoft, Cisco, Google and Pfizer held the largest amounts of cash, says the report.

Those five cash kings have $276 billion, or 22% of the total non-financial corporate cash balances, up from $207 billion, which represented 17% of the total in 2010, says Moody’s. The top 50 holders of cash account for $749 billion, up 13% from $665 billion in 2010.

Yes, the famed corporate cash pile.

So, let’s rewind this worry about syndicated lending back to the beginning. Companies are making fewer cash takeovers (and taking privates) thus require less bank funding. Corporates are raising more money through bonds, lessening their need for syndicated loans. Finally, companies are sitting on record amounts of cash lessening their need for any form of outside finance.

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